Trademark Infringement: High Stakes Gamble

Something franchisees must know: Franchisees that continue to use their franchisors’ registered trademarks after their franchise agreements have been properly terminated by their franchisors could face crippling damage awards. Under the federal Lantham Act, courts may award an injured franchisor “treble damages” -three times the amount of damages actually suffered-for willful and knowing trademark infringement, and infringers may also be required to pay the trademark owner’s attorneys fees.

In Choice Hotels Int’l, Inc. v. Bhakta, a federal district court in Corpus Christi, Texas recently held that Choice Hotels International, Inc. (“CHI”) was entitled to summary judgment on trademark infringement and unfair competition claims against a terminated franchisee, J. Bhagwanji, Inc., and its owner, Hemant Bhakta. To prove trademark infringement, CHI had to show: (1) it possessed a legally protectable mark; and (2) the franchisee used the same or similar marks in commerce in a manner likely to confuse potential customers as to the affiliation, connection, or association of the hotel with CHI. Both sides agreed that CHI owned the subject trademarks and that the franchisee continued to use them after the franchise was terminated. The court found that since the franchisee continued to use CHI’s exact mark after CHI terminated the franchise agreement and since customers had complained to CHI about the condition of the franchisee’s property, customers were actually confused, which was enough to prove the franchisee used the marks in a manner likely to confuse potential customers.

The franchisee argued that CHI had wrongfully terminated the franchise agreement and had expressly or impliedly approved continued use of its trademark. The court disagreed and awarded CHI a permanent injunction to prevent the franchisee from continuing to use CHI’s mark. The court also reminded the franchisee that the Lantham Act is intended to make trademark infringement unprofitable and that it could, if warranted, award CHI treble damage and attorney’s fees. After considering the time period during which the franchisee infringed on CHI’s marks and the franchisee’s gross sales and profits during the infringement period, the court awarded CHI $219,974.57 in damages, but declined to award CHI treble damages or attorney’s fees. Regardless, the Choice Hotels case serves as a reminder to franchisees of the risks associated with continuing to use their franchisor’s registered trademarks after their franchise agreements are terminated. Click here to see the entire case.